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The Italian dairy giant

Parmalat

-- facing a multibillion-dollar gap in its balance sheet -- announced it will seek bankruptcy protection after the government in Rome issued a decree to protect the company, according to published reports.

Italy's cabinet on Tuesday approved a measure that modifies the Prodi law for large companies seeking protection from creditors, WSJ.com reported. The move allows the companies to freeze debt without declaring bankruptcy.

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The Prodi law, named after a former Italian prime minister, has rankled the EU leadership in Brussels because it gives tax breaks, among other favors, to some companies.

The scandal broke Friday when Parmalat acknowledged that

Bank of America

was not holding about 3.95 billion euros, as Parmalat had said in September. The bank says the letter was fraudulent, and prosecutors are investigating if any crimes took place.